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Calculating elasticity for each of the given variables

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The following questions refer to this regression equation. (Standard errors in parentheses.)
QD = 15,000 - 10 P + 1500 A + 4 PX + 2 I, (5,234) (2.29) (525) (1.75) (1.5)
R2 = 0.65
N = 120
F = 35.25
Standard error of Y estimate = 565
Q = Quantity demanded
P = Price = 7,000
A = Advertising expense, in thousands = 54
PX = price of competitor's product = 8,000
I = average monthly income = 4,000

Calculate the elasticity for each variable and briefly comment on what information this gives you in each case.

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Solution Summary

Solution describes the steps to calculate elasticity for each of the given variables.

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QD =15000-10P+1500A+4PX+2I

Put
P 7,000
A =54
PX = 8,000
I = 4,000

QD=15000-10*7000+1500*54+4*8000+2*4000=66000

Calculating Own price elasticity of demand
QD =15000-10P+1500A+4PX+2I
dQD/dP=-10
Own Price=P=$7000
QD=66000 (as calculated above)
Own price elasticity of demand =(dQD/dP)*(P/Q)=-10*(7000/66000)= -1.06

For 1% increase in price quantity demanded will decrease by 1.06%. For 1% decrease in price, quantity demanded will increase by ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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